Attached files
| file | filename |
|---|---|
| EX-32.2 - EX-32.2 - WINMARK CORP | c315-20180929ex3220a4f9b.htm |
| EX-32.1 - EX-32.1 - WINMARK CORP | c315-20180929ex321b1896e.htm |
| EX-31.2 - EX-31.2 - WINMARK CORP | c315-20180929ex312b539af.htm |
| EX-31.1 - EX-31.1 - WINMARK CORP | c315-20180929ex311c46cf6.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2018
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-22012
WINMARK CORPORATION
(Exact name of registrant as specified in its charter)
|
Minnesota |
|
41-1622691 |
|
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
605 Highway 169 North, Suite 400, Minneapolis, MN 55441
(Address of principal executive offices) (Zip Code)
(763) 520-8500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer ◻ Non-accelerated filer ◻ |
|
Accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ◻ |
||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Common stock, no par value, 3,901,202 shares outstanding as of October 12, 2018.
WINMARK CORPORATION AND SUBSIDIARIES
2
WINMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
|
|
|
September 29, 2018 |
|
December 30, 2017 |
||
|
ASSETS |
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,187,200 |
|
$ |
1,073,200 |
|
Restricted cash |
|
|
55,000 |
|
|
90,000 |
|
Receivables, less allowance for doubtful accounts of $900 and $400 |
|
|
1,756,900 |
|
|
1,796,000 |
|
Net investment in leases - current |
|
|
17,568,700 |
|
|
15,332,300 |
|
Income tax receivable |
|
|
— |
|
|
2,161,800 |
|
Inventories |
|
|
128,200 |
|
|
97,100 |
|
Prepaid expenses |
|
|
1,075,400 |
|
|
901,600 |
|
Total current assets |
|
|
21,771,400 |
|
|
21,452,000 |
|
Net investment in leases - long-term |
|
|
26,949,600 |
|
|
25,945,300 |
|
Property and equipment, net |
|
|
725,500 |
|
|
486,800 |
|
Goodwill |
|
|
607,500 |
|
|
607,500 |
|
Other assets |
|
|
440,500 |
|
|
350,400 |
|
|
|
$ |
50,494,500 |
|
$ |
48,842,000 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) |
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
Notes payable, net of unamortized debt issuance costs of $13,900 and $13,900 |
|
$ |
3,236,100 |
|
$ |
3,236,100 |
|
Accounts payable |
|
|
1,445,000 |
|
|
2,073,000 |
|
Income tax payable |
|
|
902,800 |
|
|
— |
|
Accrued liabilities |
|
|
3,273,000 |
|
|
1,837,300 |
|
Discounted lease rentals |
|
|
2,555,600 |
|
|
570,800 |
|
Deferred revenue |
|
|
1,713,100 |
|
|
1,714,900 |
|
Total current liabilities |
|
|
13,125,600 |
|
|
9,432,100 |
|
Long-Term Liabilities: |
|
|
|
|
|
|
|
Line of credit |
|
|
10,100,000 |
|
|
35,400,000 |
|
Notes payable, net of unamortized debt issuance costs of $86,000 and $96,500 |
|
|
26,413,900 |
|
|
28,841,000 |
|
Discounted lease rentals |
|
|
2,364,600 |
|
|
1,121,600 |
|
Deferred revenue |
|
|
8,561,400 |
|
|
8,595,300 |
|
Other liabilities |
|
|
1,211,900 |
|
|
845,000 |
|
Deferred income taxes |
|
|
425,800 |
|
|
320,500 |
|
Total long-term liabilities |
|
|
49,077,600 |
|
|
75,123,400 |
|
Shareholders’ Equity (Deficit): |
|
|
|
|
|
|
|
Common stock, no par value, 10,000,000 shares authorized, 3,901,202 and 3,843,078 shares issued and outstanding |
|
|
4,597,400 |
|
|
1,476,200 |
|
Retained earnings (accumulated deficit) |
|
|
(16,306,100) |
|
|
(37,189,700) |
|
Total shareholders’ equity (deficit) |
|
|
(11,708,700) |
|
|
(35,713,500) |
|
|
|
$ |
50,494,500 |
|
$ |
48,842,000 |
The accompanying notes are an integral part of these financial statements.
3
WINMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
|
September 29, 2018 |
|
September 30, 2017 |
|
September 29, 2018 |
|
September 30, 2017 |
||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties |
|
$ |
12,865,900 |
|
$ |
12,316,700 |
|
$ |
35,735,900 |
|
$ |
33,865,100 |
|
Leasing income |
|
|
4,608,600 |
|
|
3,915,800 |
|
|
14,994,500 |
|
|
13,722,000 |
|
Merchandise sales |
|
|
858,400 |
|
|
773,100 |
|
|
2,340,200 |
|
|
2,058,500 |
|
Franchise fees |
|
|
383,300 |
|
|
342,900 |
|
|
1,162,300 |
|
|
1,180,300 |
|
Other |
|
|
402,300 |
|
|
382,400 |
|
|
1,206,400 |
|
|
1,145,600 |
|
Total revenue |
|
|
19,118,500 |
|
|
17,730,900 |
|
|
55,439,300 |
|
|
51,971,500 |
|
Cost of merchandise sold |
|
|
811,500 |
|
|
728,300 |
|
|
2,235,000 |
|
|
1,942,400 |
|
Leasing expense |
|
|
718,500 |
|
|
792,000 |
|
|
1,769,200 |
|
|
2,724,000 |
|
Provision for credit losses |
|
|
(55,600) |
|
|
(13,300) |
|
|
148,400 |
|
|
(26,200) |
|
Selling, general and administrative expenses |
|
|
6,208,800 |
|
|
6,184,400 |
|
|
19,702,500 |
|
|
19,165,300 |
|
Income from operations |
|
|
11,435,300 |
|
|
10,039,500 |
|
|
31,584,200 |
|
|
28,166,000 |
|
Interest expense |
|
|
(576,900) |
|
|
(613,900) |
|
|
(1,978,600) |
|
|
(1,559,300) |
|
Interest and other income (expense) |
|
|
(1,000) |
|
|
28,000 |
|
|
(13,300) |
|
|
29,900 |
|
Income before income taxes |
|
|
10,857,400 |
|
|
9,453,600 |
|
|
29,592,300 |
|
|
26,636,600 |
|
Provision for income taxes |
|
|
(2,493,100) |
|
|
(3,593,000) |
|
|
(7,124,600) |
|
|
(9,694,500) |
|
Net income |
|
$ |
8,364,300 |
|
$ |
5,860,600 |
|
$ |
22,467,700 |
|
$ |
16,942,100 |
|
Earnings per share - basic |
|
$ |
2.15 |
|
$ |
1.46 |
|
$ |
5.81 |
|
$ |
4.10 |
|
Earnings per share - diluted |
|
$ |
2.01 |
|
$ |
1.36 |
|
$ |
5.43 |
|
$ |
3.84 |
|
Weighted average shares outstanding - basic |
|
|
3,886,473 |
|
|
4,024,692 |
|
|
3,864,077 |
|
|
4,131,269 |
|
Weighted average shares outstanding - diluted |
|
|
4,164,339 |
|
|
4,314,412 |
|
|
4,140,816 |
|
|
4,416,185 |
The accompanying notes are an integral part of these financial statements.
4
WINMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
|
September 29, 2018 |
|
September 30, 2017 |
|
September 29, 2018 |
|
September 30, 2017 |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,364,300 |
|
$ |
5,860,600 |
|
$ |
22,467,700 |
|
$ |
16,942,100 |
|
Other comprehensive income (loss), before tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding net gains (losses) arising during period |
|
|
— |
|
|
(700) |
|
|
— |
|
|
15,900 |
|
Other comprehensive income (loss), before tax |
|
|
— |
|
|
(700) |
|
|
— |
|
|
15,900 |
|
Income tax (expense) benefit related to items of other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net gains/losses on marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding net gains/losses arising during period |
|
|
— |
|
|
300 |
|
|
— |
|
|
(6,000) |
|
Income tax (expense) benefit related to items of other comprehensive income |
|
|
— |
|
|
300 |
|
|
— |
|
|
(6,000) |
|
Other comprehensive income (loss), net of tax |
|
|
— |
|
|
(400) |
|
|
— |
|
|
9,900 |
|
Comprehensive income |
|
$ |
8,364,300 |
|
$ |
5,860,200 |
|
$ |
22,467,700 |
|
$ |
16,952,000 |
The accompanying notes are an integral part of these financial statements.
5
WINMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Nine Months Ended |
|
||||
|
|
|
September 29, 2018 |
|
September 30, 2017 |
|
||
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
22,467,700 |
|
$ |
16,942,100 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
233,700 |
|
|
275,700 |
|
|
Provision for credit losses |
|
|
148,400 |
|
|
(26,200) |
|
|
Compensation expense related to stock options |
|
|
1,507,800 |
|
|
1,462,500 |
|
|
Deferred income taxes |
|
|
105,300 |
|
|
153,400 |
|
|
Gain on sale of marketable securities |
|
|
— |
|
|
(1,400) |
|
|
Deferred initial direct costs |
|
|
(1,198,600) |
|
|
(369,200) |
|
|
Amortization of deferred initial direct costs |
|
|
809,500 |
|
|
345,300 |
|
|
Tax benefits on exercised stock options |
|
|
297,900 |
|
|
592,800 |
|
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Receivables |
|
|
39,100 |
|
|
(228,900) |
|
|
Income tax receivable/payable |
|
|
2,766,700 |
|
|
(630,600) |
|
|
Inventories |
|
|
(31,100) |
|
|
20,500 |
|
|
Prepaid expenses |
|
|
(173,800) |
|
|
189,900 |
|
|
Other assets |
|
|
(90,100) |
|
|
(18,700) |
|
|
Accounts payable |
|
|
(628,000) |
|
|
(217,400) |
|
|
Accrued and other liabilities |
|
|
1,775,800 |
|
|
754,400 |
|
|
Rents received in advance and security deposits |
|
|
(376,000) |
|
|
92,800 |
|
|
Deferred revenue |
|
|
(35,700) |
|
|
(98,700) |
|
|
Net cash provided by operating activities |
|
|
27,618,600 |
|
|
19,238,300 |
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from sale of marketable securities |
|
|
— |
|
|
217,200 |
|
|
Purchase of property and equipment |
|
|
(472,400) |
|
|
(53,800) |
|
|
Purchase of equipment for lease contracts |
|
|
(20,219,800) |
|
|
(19,253,300) |
|
|
Principal collections on lease receivables |
|
|
16,303,500 |
|
|
20,078,100 |
|
|
Net cash provided by (used for) investing activities |
|
|
(4,388,700) |
|
|
988,200 |
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from borrowings on line of credit |
|
|
7,300,000 |
|
|
46,900,000 |
|
|
Payments on line of credit |
|
|
(32,600,000) |
|
|
(28,400,000) |
|
|
Proceeds from borrowings on notes payable |
|
|
— |
|
|
12,500,000 |
|
|
Payments on notes payable |
|
|
(2,437,500) |
|
|
(1,500,000) |
|
|
Repurchases of common stock |
|
|
(558,200) |
|
|
(49,904,100) |
|
|
Proceeds from exercises of stock options |
|
|
2,171,600 |
|
|
1,329,200 |
|
|
Dividends paid |
|
|
(1,584,100) |
|
|
(1,343,800) |
|
|
Proceeds from discounted lease rentals |
|
|
4,557,300 |
|
|
— |
|
|
Net cash used for financing activities |
|
|
(23,150,900) |
|
|
(20,418,700) |
|
|
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
|
|
79,000 |
|
|
(192,200) |
|
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
1,163,200 |
|
|
1,292,900 |
|
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
1,242,200 |
|
$ |
1,100,700 |
|
|
SUPPLEMENTAL DISCLOSURES: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
2,015,000 |
|
$ |
1,349,500 |
|
|
Cash paid for income taxes |
|
$ |
3,954,700 |
|
$ |
9,514,800 |
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Condensed Balance Sheets to the total of the same amounts shown above: |
|
||||||
|
|
|
Nine Months Ended |
|
||||
|
|
|
September 29, 2018 |
|
September 30, 2017 |
|
||
|
Cash and cash equivalents |
|
$ |
1,187,200 |
|
$ |
1,060,700 |
|
|
Restricted cash |
|
|
55,000 |
|
|
40,000 |
|
|
Total cash, cash equivalents and restricted cash |
|
$ |
1,242,200 |
|
$ |
1,100,700 |
|
The accompanying notes are an integral part of these financial statements.
6
WINMARK CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Management’s Interim Financial Statement Representation:
The accompanying consolidated condensed financial statements have been prepared by Winmark Corporation and subsidiaries (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The Company has a 52/53 week year which ends on the last Saturday in December. The information in the consolidated condensed financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements. The consolidated condensed financial statements and notes are presented in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q, and therefore do not contain certain information included in the Company’s annual consolidated financial statements and notes. This report should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K.
Revenues and operating results for the nine months ended September 29, 2018 are not necessarily indicative of the results to be expected for the full year.
Reclassifications
Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. Such reclassifications did not impact net income or shareholders’ equity (deficit) as previously reported.
2. Organization and Business:
The Company offers licenses to operate franchises using the service marks Plato’s Closet®, Once Upon A Child®, Play It Again Sports®, Style Encore® and Music Go Round®. The Company uses its Winmark Franchise Partners® mark in connection with its strategic consulting and corporate development activities. The Company also operates both middle market and small-ticket equipment leasing businesses under the Winmark Capital® and Wirth Business Credit® marks.
3. Recent Accounting Pronouncements:
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which provides guidance on accounting for leases that supersedes existing lease accounting guidance. The ASU’s core principle is that a lessee should recognize lease assets and lease liabilities for those leases classified as operating leases under existing lease accounting guidance. The new standard also makes targeted changes to lessor accounting. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. This guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently in the process of evaluating the transition method and impact of the adoption of this ASU on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This guidance will be effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is currently in the process of evaluating the impact of the adoption of this ASU on the Company’s consolidated financial statements.
Recently Adopted Accounting Pronouncements
In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows, Restricted Cash which provides guidance on the presentation of restricted cash within an entity’s cash flow statement. The Company adopted ASU 2016-18 in the
7
first quarter of 2018 on a retrospective basis. Restricted cash is now presented with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides guidance for revenue recognition that supersedes existing revenue recognition guidance (but does not apply to nor supersede accounting guidance for lease contracts). The ASU’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted ASU 2014-09 in the first quarter of 2018, using the full retrospective method.
The adoption of this guidance did not impact the Company’s recognition of leasing revenues or revenue from royalties that are based on a percentage of franchisee sales. Upon adoption, initial franchise fees, which were previously recognized upon the opening of a franchise, are deferred and recognized over the term of the estimated life of the franchise. The effect of the required deferral of initial franchise fees received in a given year was mitigated by the recognition of revenue from fees retrospectively deferred from prior years. The Company bills and collects marketing fees from its franchisees at various times throughout the year. This amount is included in the Revenue: Other line of the Consolidated Condensed Statements of Operations. Previously, marketing fees were recognized at the time of billing. In accordance with the new guidance, the Company recognizes marketing fee revenue on a straight line basis over the franchise duration. The Company previously recognized commission fees related to franchise agreement contracts as selling expenses when they were incurred. In accordance with the new guidance, the Company capitalizes the commission fees as costs of obtaining a contract and amortizes them over the franchise duration. (See Note 4 – Revenue Recognition: Franchising)
Adoption of the standard using the full retrospective method also required the Company to restate certain previously reported results, as shown in the tables below:
|
Condensed Consolidated Statement of Operations: |
|
Three Months Ended September 30, 2017 |
|
Nine Months Ended September 30, 2017 |
||||||||||||||
|
|
|
As Previously Reported |
|
Adjustments |
|
As Restated |
|
As Previously Reported |
|
Adjustments |
|
As Restated |
||||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise fees |
|
$ |
317,800 |
|
$ |
25,100 |
|
$ |
342,900 |
|
$ |
1,262,500 |
|
$ |
(82,200) |
|
$ |
1,180,300 |
|
Other |
|
|
244,500 |
|
|
137,900 |
|
|
382,400 |
|
|
1,033,100 |
|
|
112,500 |
|
|
1,145,600 |
|
Selling, general and administrative expenses |
|
|
6,208,900 |
|
|
(24,500) |
|
|
6,184,400 |
|
|
19,179,400 |
|
|
(14,100) |
|
|
19,165,300 |
|
Provision for income taxes |
|
|
(3,547,100) |
|
|
(45,900) |
|
|
(3,593,000) |
|
|
(9,683,600) |
|
|
(10,900) |
|
|
(9,694,500) |
|
Net income |
|
|
5,719,000 |
|
|
141,600 |
|
|
5,860,600 |
|
|
16,908,600 |
|
|
33,500 |
|
|
16,942,100 |
|
Earnings per share - basic |
|
$ |
1.42 |
|
$ |
0.04 |
|
$ |
1.46 |
|
$ |
4.09 |
|
$ |
0.01 |
|
$ |
4.10 |
|
Earnings per share - diluted |
|
$ |
1.33 |
|
$ |
0.03 |
|
$ |
1.36 |
|
$ |
3.83 |
|
$ |
0.01 |
|
$ |
3.84 |
|
Consolidated Balance Sheet: |
|
|
December 30, 2017 |
||||||
|
|
|
|
As Previously Reported |
|
|
Adjustments |
|
|
As Restated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
$ |
814,800 |
|
$ |
86,800 |
|
$ |
901,600 |
|
Other assets |
|
|
— |
|
|
350,400 |
|
|
350,400 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT): |
|
|
|
|
|
|
|
|
|
|
Deferred revenue-Current |
|
$ |
1,736,200 |
|
$ |
(21,300) |
|
$ |
1,714,900 |
|
Deferred revenue-Long term |
|
|
1,465,500 |
|
|
7,129,800 |
|
|
8,595,300 |
|
Deferred income taxes |
|
|
1,956,500 |
|
|
(1,636,000) |
|
|
320,500 |
|
Retained earnings (accumulated deficit) |
|
|
(32,154,400) |
|
|
(5,035,300) |
|
|
(37,189,700) |
8
4. Revenue Recognition: Franchising
The following is a description of the principal sources of revenue for the company’s franchising segment. The Company’s performance obligations under franchise agreements consist of (a) a franchise license, including a license to use one of our brands, (b) a point-of-sale software license, (c) initial services, such as pre-opening training and marketing support, and (d) ongoing services, such as marketing services and operational support. These performance obligations are highly interrelated so we do not consider them to be individually distinct and therefore account for them under ASC 606 as a single performance obligation, which is satisfied by providing a right to use our intellectual property over the estimated life of the franchise. The disaggregation of the Company’s franchise revenue is presented within the Revenue lines of the Consolidated Condensed Statements of Operations with the amounts included in Revenue: Other delineated below. For more detailed information about reportable segments, see Note 13 – “Segment Reporting”.
Royalties
The Company collects royalties from each retail franchise based upon a percentage of retail store gross sales. The Company recognizes royalties as revenue when earned.
Merchandise Sales
Merchandise sales include the sale of point-of-sale technology equipment to franchisees and the sale of a limited amount of sporting goods to certain Play It Again Sports franchisees. Merchandise sales, which includes shipping and handling charges, are recognized at a point in time when the product has been shipped to the franchisee. Sales taxes that are collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore excluded from merchandise sales. Shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and included in cost of merchandise sold.
Franchise Fees
The Company collects initial franchise fees when franchise agreements are signed. The Company recognizes franchise fee revenue over the estimated life of the franchise, beginning with the opening of the franchise, which is when the Company has performed substantially all initial services required by the franchise agreement and the franchisee benefits from the rights afforded by the franchise agreement.
Marketing Fees
Marketing fee revenue is included in the Revenue: Other line of the Consolidated Condensed Statements of Operations. The Company bills and collects annual marketing fees from its franchisees at various times throughout the year. The Company recognizes marketing fee revenue on a straight line basis over the franchise duration. The Company recognized $0.3 million of marketing fee revenue for each of the three months ended September 29, 2018 and September 30, 2017, and $0.9 million for each of the nine months ended September 29, 2018 and September 30, 2017.
Software License Fees
Software license fee revenue is included in the Revenue: Other line of the Consolidated Condensed Statements of Operations. The Company bills and collects software license fees from its franchisees when the point-of-sale system is provided to the franchisee. The Company recognizes software license fee revenue on a straight line basis over the franchise duration. The Company recognized $0.1 million of software license fee revenue for each of the three months ended September 29, 2018 and September 30, 2017, and $0.2 million for each of the nine months ended September 29, 2018 and September 30, 2017.
9
Contract Liabilities
The Company’s contract liabilities for its franchise revenues consist of deferred revenue associated with franchise fees and software license fees described above. The table below presents the activity of the current and noncurrent deferred franchise revenue during the first nine months of 2018 and 2017, respectively:
|
|
|
September 29, 2018 |
|
September 30, 2017 |
||
|
Balance at beginning of period |
|
$ |
10,310,200 |
|
$ |
10,408,500 |
|
Franchise and software license fees collected from franchisees, excluding amount earned as revenue during the period |
|
|
1,354,500 |
|
|
1,295,600 |
|
Fees earned that were included in the balance at the beginning of the period |
|
|
(1,390,200) |
|
|
(1,394,300) |
|
Balance at end of period |
|
$ |
10,274,500 |
|
$ |
10,309,800 |
The following table illustrates future estimated revenue to be recognized for the remainder of 2018 and full fiscal years thereafter related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 29, 2018.
|
Contract Liabilities expected to be recognized in |
|
|
Amount |
||
|
2018 |
|
|
|
$ |
429,200 |
|
2019 |
|
|
|
|
1,711,800 |
|
2020 |
|
|
|
|
1,575,300 |
|
2021 |
|
|
|
|
1,436,500 |
|
2022 |
|
|
|
|
1,291,500 |
|
Thereafter |
|
|
|
|
3,830,200 |
|
|
|
|
|
$ |
10,274,500 |
Commission Fees
The Company capitalizes incremental commission fees paid as a result of obtaining franchise agreement contracts. Capitalized commission fees of $0.5 million and $0.4 million are outstanding at September 29, 2018 and December 30, 2017, respectively and are included in Prepaid expenses and Other assets of the Consolidated Condensed Balance Sheets.
Capitalized commission fees are amortized over the life of the franchise and are included in selling, general and administrative expenses. During the three months ended September 29, 2018 and September 30, 2017, the Company recognized $24,800 and $24,800 of commission fee expense, respectively. During the nine months ended September 29, 2018 and September 30, 2017, the Company recognized $73,200 and $74,700 of commission fee expense, respectively.
5. Fair Value Measurements:
The Company defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses three levels of inputs to measure fair value:
|
· |
Level 1 – quoted prices in active markets for identical assets and liabilities. |
|
· |
Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities. |
|
· |
Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions. |
Due to their nature, the carrying value of cash equivalents, receivables, payables and debt obligations approximates fair value.
10
6. Investment in Leasing Operations:
Investment in leasing operations consists of the following:
|
|
|
September 29, 2018 |
|
December 30, 2017 |
||
|
Direct financing and sales-type leases: |
|
|
|
|
|
|
|
Minimum lease payments receivable |
|
$ |
41,669,100 |
|
$ |
36,119,700 |
|
Estimated residual value of equipment |
|
|
4,254,200 |
|
|
4,762,700 |
|
Unearned lease income net of initial direct costs deferred |
|
|
(7,222,200) |
|
|
(5,371,900) |
|
Security deposits |
|
|
(4,112,700) |
|
|
(4,526,000) |
|
Equipment installed on leases not yet commenced |
|
|
10,861,600 |
|
|
10,989,700 |
|
Total investment in direct financing and sales-type leases |
|
|
45,450,000 |
|
|
41,974,200 |
|
Allowance for credit losses |
|
|
(969,200) |
|
|
(711,200) |
|
Net investment in direct financing and sales-type leases |
|
|
44,480,800 |
|
|
41,263,000 |
|
Operating leases: |
|
|
|
|
|
|
|
Operating lease assets |
|
|
736,800 |
|
|
1,045,400 |
|
Less accumulated depreciation and amortization |
|
|
(699,300) |
|
|
(1,030,800) |
|
Net investment in operating leases |
|
|
37,500 |
|
|
14,600 |
|
Total net investment in leasing operations |
|
$ |
44,518,300 |
|
$ |
41,277,600 |
As of September 29, 2018, the $44.5 million total net investment in leases consists of $17.6 million classified as current and $26.9 million classified as long-term. As of December 30, 2017, the $41.3 million total net investment in leases consists of $15.3 million classified as current and $26.0 million classified as long-term.
As of September 29, 2018, leased assets with two customers approximated 24% and 11%, respectively, of the Company’s total assets. A portion of the lease payments receivable from these customers is assigned as collateral in non-recourse financing with financial institutions. See Note 10 – “Discounted Lease Rentals”.
Future minimum lease payments receivable under lease contracts and the amortization of unearned lease income, net of initial direct costs deferred, is as follows for the remainder of fiscal 2018 and the full fiscal years thereafter as of September 29, 2018:
|
|
|
Direct Financing and Sales-Type Leases |
|
Operating Leases |
|
|||||
|
|
|
Minimum Lease |
|
Income |
|
Minimum Lease |
|
|||
|
Fiscal Year |
|
Payments Receivable |
|
Amortization |
|
Payments Receivable |
|
|||
|
2018 |
|
$ |
6,522,300 |
|
$ |
1,832,900 |
|
$ |
42,100 |
|
|
2019 |
|
|
23,754,600 |
|
|
4,580,700 |
|
|
76,900 |
|
|
2020 |
|
|
9,623,900 |
|
|
752,700 |
|
|
— |
|
|
2021 |
|
|
1,742,200 |
|
|
54,000 |
|
|
— |
|
|
2022 |
|
|
13,700 |
|
|
1,300 |
|
|
— |
|
|
Thereafter |
|
|
12,400 |
|
|
600 |
|
|
— |
|
|
|
|
$ |
41,669,100 |
|
$ |
7,222,200 |
|
$ |
119,000 |
|
The activity in the allowance for credit losses for leasing operations during the first nine months of 2018 and 2017, respectively, is as follows:
|
|
|
September 29, 2018 |
|
September 30, 2017 |
|
||
|
Balance at beginning of period |
|
$ |
711,200 |
|
$ |
896,000 |
|
|
Provisions charged to expense |
|
|
148,400 |
|
|
(26,200) |
|
|
Recoveries |
|
|
210,700 |
|
|
13,800 |
|
|
Deductions for amounts written-off |
|
|
(101,100) |
|
|
— |
|
|
Balance at end of period |
|
$ |
969,200 |
|
$ |
883,600 |
|
11
The Company’s investment in direct financing and sales-type leases (“Investment In Leases”) and allowance for credit losses by loss evaluation methodology are as follows:
|
|
|
September 29, 2018 |
|
December 30, 2017 |
||||||||
|
|
|
Investment |
|
Allowance for |
|
Investment |
|
Allowance for |
||||
|
|
|
In Leases |
|
Credit Losses |
|
In Leases |
|
Credit Losses |
||||
|
Collectively evaluated for loss potential |
|
$ |
45,450,000 |
|
$ |
969,200 |
|
$ |
41,974,200 |
|
$ |
711,200 |
|
Individually evaluated for loss potential |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Total |
|
$ |
45,450,000 |
|
$ |
969,200 |
|
$ |
41,974,200 |
|
$ |
711,200 |
The Company’s key credit quality indicator for its investment in direct financing and sales-type leases is the status of the lease, defined as accruing or non-accrual. Leases that are accruing income are considered to have a lower risk of loss. Non-accrual leases are those that the Company believes have a higher risk of loss. The following table sets forth information regarding the Company’s accruing and non-accrual leases. Delinquent balances are determined based on the contractual terms of the lease.
|
|
|
September 29, 2018 |
|||||||||||||
|
|
|
0-60 Days |
|
61-90 Days |
|
Over 90 Days |
|
|
|
|
|
|
|||
|
|
|
Delinquent |
|
Delinquent |
|
Delinquent and |
|
|
|
|
|
|
|||
|
|
|
and Accruing |
|
and Accruing |
|
Accruing |
|
Non-Accrual |
|
Total |
|||||
|
Middle-Market |
|
$ |
44,145,700 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
44,145,700 |
|
Small-Ticket |
|
|
1,304,300 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,304,300 |
|
Total Investment in Leases |
|
$ |
45,450,000 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
45,450,000 |
|
|
|
December 30, 2017 |
|||||||||||||
|
|
|
0-60 Days |
|
61-90 Days |
|
Over 90 Days |
|
|
|
|
|
|
|||
|
|
|
Delinquent |
|
Delinquent |
|
Delinquent and |
|
|
|
|
|
|
|||
|
|
|
and Accruing |
|
and Accruing |
|
Accruing |
|
Non-Accrual |
|
Total |
|||||
|
Middle-Market |
|
$ |
40,657,500 |
|
$ |
133,700 |
|
$ |
— |
|
$ |
— |
|
$ |
40,791,200 |
|
Small-Ticket |
|
|
1,183,000 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,183,000 |
|
Total Investment in Leases |
|
$ |
41,840,500 |
|
$ |
133,700 |
|
$ |
— |
|
$ |
— |
|
$ |
41,974,200 |
7. Earnings Per Share:
The following table sets forth the presentation of shares outstanding used in the calculation of basic and diluted earnings per share (“EPS”):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
|
September 29, 2018 |
|
September 30, 2017 |
|
September 29, 2018 |
|
September 30, 2017 |
|
|
Denominator for basic EPS — weighted average common shares |
|
3,886,473 |
|
4,024,692 |
|
3,864,077 |
|
4,131,269 |
|
|
Dilutive shares associated with option plans |
|
277,866 |
|
289,720 |
|
276,739 |
|
284,916 |
|
|
Denominator for diluted EPS — weighted average common shares and dilutive potential common shares |
|
4,164,339 |
|
4,314,412 |
|
4,140,816 |
|
4,416,185 |
|
|
Options excluded from EPS calculation — anti-dilutive |
|
6,116 |
|
10,753 |
|
15,428 |
|
16,057 |
|
12
8. Shareholders’ Equity (Deficit):
Dividends
On January 24, 2018, the Company’s Board of Directors approved the payment of a $0.11 per share quarterly cash dividend to shareholders of record at the close of business on February 7, 2018, which was paid on March 1, 2018.
On April 25, 2018, the Company’s Board of Directors approved the payment of a $0.15 per share quarterly cash dividend to shareholders of record at the close of business on May 9, 2018, which was paid on June 1, 2018.
On July 25, 2018, the Company’s Board of Directors approved the payment of a $0.15 per share quarterly cash dividend to shareholders of record at the close of business on August 8, 2018, which was paid on September 4, 2018.
Repurchase of Common Stock
In the first nine months of 2018 the Company repurchased 3,770 shares of its common stock. Under the Board of Directors’ authorization, as of September 29, 2018, the Company has the ability to repurchase an additional 139,218 shares of its common stock. Repurchases may be made from time to time at prevailing prices, subject to certain restrictions on volume, pricing and timing.
Stock Option Plans and Stock-Based Compensation
The Company had authorized up to 750,000 shares of common stock be reserved for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2001 Stock Option Plan (the “2001 Plan”). The 2001 Plan expired on February 20, 2011. As of September 29, 2018, the Company has authorized up to 700,000 shares of common stock to be reserved for granting either nonqualified or incentive stock options to officers and key employees under the Company’s 2010 Stock Option Plan (the “2010 Plan”).
The Company also sponsors a Stock Option Plan for Nonemployee Directors (the “Nonemployee Directors Plan”) and has reserved a total of 350,000 shares for issuance to directors of the Company who are not employees.
Stock option activity under the 2001 Plan, 2010 Plan and Nonemployee Directors Plan (collectively, the “Option Plans”) as of September 29, 2018 was as follows:
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
Number of |
|
Weighted Average |
|
Contractual Life |
|
|
|
|
|
|
|
Shares |
|
Exercise Price |
|
(years) |
|
|
Intrinsic Value |
|
|
Outstanding, December 30, 2017 |
|
658,184 |
|
$ |
72.33 |
|
5.87 |
|
$ |
37,723,800 |
|
Granted |
|
35,000 |
|
|
143.20 |
|
|
|
|
|
|
Exercised |
|
(64,143) |
|
|
38.53 |
|
|
|
|
|